Tax incentives, tax cuts on Geithner's agenda

U.S. Treasury Secretary Tim Geithner, shown here speaking about the future of the US-China economic relationship in Washington Jan. 12, 2011, is expected to talk about a whole host of tax-related issues Friday with corporate financial officers. Among the topics: cutting corporate taxes and addressing tax incentives that skew the tax code.

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January 12, 2011

By Kim DixonReuters

WASHINGTON

U.S. Treasury Secretary Timothy Geithner meets with chief financial officers and other officials Friday to hash out ideas for simplifying and trimming the corporate tax -- nearly the highest in the industrialized world.

It would require a major effort to overhaul the corporate tax code, which is packed with tax incentives favoring certain industries and even specific companies, experts say.

``The U.S. tax code is the most politicized law in the entire world,'' said Jonathan Blattmachr, a tax lawyer for the wealthy based in New York. ``Everything is driven by politics; not by what is fair or sensible.''

Many analysts believe it could be a multiyear process. Here are some keys to the debate.

Experts across the ideological spectrum say the high corporate rate leads companies to move and keep money abroad. When people talk about an overhaul, they generally mean cutting the rate and ``broadening the base'' of companies paying taxes.

``Lowering rates and closing loopholes is, I think, the best approach,'' in the long term, he told the Senate Budget panel.

``Broadening the base'' means bringing more taxpayers into the system and closing what some call ``loopholes'' -- deductions and other ways companies use to minimize taxes.

That is where it gets tricky.

WHO WOULD WIN, WHO WOULD LOSE?

Big pharmaceutical and technology companies could be among the losers in a rewrite of the tax code that lowers overall rates but also trims loopholes and deductions, according to Anne Mathias, an analyst at MF Global in Washington.

Because of their extensive international operations, they have ``aggressively utilized the existing system'' and have managed to keep their effective tax rates in the low 20 percent range, Mathias said in a recent investor note.

Winners could be companies with mostly U.S. sales, like retail, food service and healthcare companies.

``Somebody is going to pay more; let's get serious,'' said Bruce Josten, executive vice president at the Chamber of Commerce.

WHAT ARE THE STICKING POINTS?

Obama's past two budgets sought to curb sections of the tax code that allow companies to defer taxes on profits earned abroad. Congress has taken up some small slices of these tax incentives but generally stayed away from the more controversial proposals.

U.S. companies are generally taxed on income earned worldwide and get tax credits to avoid double taxation for taxes paid abroad. Business says these credits do not fully offset the cost and want to move to a ``territorial'' system in which they are taxed just on income earned in the United States.

The deficit commission panel set up by President Barack Obama recommended a move to a territorial system in its report late last year. That report failed to gain enough votes to trigger a congressional vote, but many see it as a model for reform.

Obama administration officials have been largely silent on moving to a territorial system, so a move in this direction could signal progress.

WHAT HAS OBAMA PROPOSED?

Obama's first budget aimed to limit ``deferral'' of taxes on income earned abroad by companies and sought to tighten other tax polices to bring the Treasury $210 billion over a decade.

His second budget also proposed limiting deferral, but allowed more exceptions, raising a more modest $120 billion.

Under the proposals, companies would not be able to write off certain expenses until they paid taxes on profits associated with those expenses.

Obama has also sought to limit what officials call abuse of the foreign tax credit system and curb tax breaks for oil and gas companies, which would raise $38 billion over a decade.

WHAT TO WATCH IN THE NEAR TERM?

Observers are eyeing Obama's late January State of the Union address to gauge whether tax reform will be a major priority in the second half of his term.

In mid-February, the president's budget will be released, which may highlight those recommendations of the deficit panel the president will support.

In Congress, the chairmen of the tax-writing panels will have a series of hearings as well.